Hang Seng Index resumes downtrend as China returns to deflation

China's consumer prices dropped by 0.2% year-over-year in October 2023, worse than the estimated 0.1% fall and a flat rate in September, signalling that the world’s second-largest economy has returned to deflation mode.

In October, China's food prices dropped by 4%, while non-food inflation remained relatively stable. According to the statistics agency, the decline in the CPI print was largely attributed to the oversupply of agricultural products, however, it’s also underscoring a deteriorating domestic demand on the other hand.

In terms of producer prices, China's out-of-factory prices continue to decline in October. China's PPI fell by an annual rate of 2.6% in the previous month, marking the 13th consecutive month of producer deflation.

Overall, this week’s weaker-than-expected consumer prices and balance of trade data highlight the discomfiting reality that China's deflationary pressures are set to stay. Moreover, the fragility of China's economic recovery in 2023 is more than likely to persist in the year ahead.

Hang Seng Index techinical analysis

The Hang Seng Index, despite a strong breakthrough of the 50-day moving average earlier this week, failed to conquer the level above 18,000, leaving it with a lower-high below the October peak (18156) and thus forming a new descending trendline.

Short-term support lies near the 20-day moving average at around 17,357, while near-term pressure comes from the 50-day moving average and the bottom of August, between 17,575 and 17,603.